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The Pharmacy Benefit Management (PBM) industry is the Goliath of healthcare. PBMs have a huge impact on prescription healthcare that is little understood outside of the pharmacy industry. According to a November 2016 report, PBMs in the United States have revenues of $423 billion, they experienced 11-16% growth between 2011 and 2016, and they employ a workforce of at least 30,000. Additionally, Congressional testimony revealed that the top PBMs nearly doubled their profits over the past five years. The breadth and depth of the role that PBMs play in the lifecycle of a prescription drug is unequaled in healthcare. PBMs touch, in one aspect or another, nearly every drug dispensed nationally. But if you ask the average consumer who their particular PBM is, or even what a PBM does, few could answer those questions.

PBMs are middle men, “third-party administrators” that act as on behalf of private insurers to provide all of the services needed to manage a prescription benefit. PBMs provide drug plan design services, meaning that they assist insurers in designing and maintaining the formulary, which determines what medications are covered under a particular plan. PBMs also negotiate with drug manufacturers to obtain favorable drug prices and related manufacturer rebates. Once a drug program is implemented, PBMs are supposed to assist in controlling these drug costs. Through their mail order and retail pharmacy networks, PBMs determine the drug costs and dispensing fees paid by insurance companies and by beneficiaries through copays. PBMs also process and pay claims for virtually every prescription dispensed across the country every day. Companies that operate some of the largest PBMs (i.e., CVS Health and EnvisionRx), through related entities, also control huge swaths of the specialty, mail order, and retail pharmacy industry. These wholly-integrated PBMs control the entire prescription benefit process – from designing the drug programs to dispensing prescriptions.

Due to their historical involvement in commercial prescription benefit plans, PBMs play a central role in Medicare Part D, Medicaid, and other government-sponsored prescription drug programs. However, PBMs significantly impact both commercial and government-funded prescription programs, including Medicare Part D, Medicaid, prescription programs for state and federal employees, and healthcare benefits for our military, including Tricare.

Government agencies and private insurers are David to the PBM Goliaths. Identifying, quantifying, and controlling fraud, waste, and abuse in government-funded prescription drug programs, particularly as it relates to the PBM industry, is difficult at best. One of the greatest hurdles to prescription benefit oversight is the lack of transparency between the government agencies that fund drug benefits and PBMs that manage them.

Government agencies lack access to the PBM’s relationships with both drug manufacturers and their pharmacy networks, and significant related hidden income streams. One such income stream is related to the PBMs’ negotiations with drug manufactures to set drug prices paid by the PBM, as well as related volume-based rebates that are earned on specific drugs. PBMs share these rebates with drug benefit sponsors. A second income stream for PBMs results from the role PBMs play in setting drug costs and dispensing fees paid to the PBM’s network of retail, mail order and specialty pharmacies. When prescriptions are dispensed to beneficiaries, the PBM profits from the difference or “spread” between the price the PBM negotiates with drug manufactures and the price the PBM charges its network pharmacies.

The government also lacks access to the pharmacy claims data received by the PBM. It is unable to compare the pharmacy data to claims data that PBMs submit to insurance companies. In the Part D program, this same claims data is submitted to the Centers for Medicare and Medicaid Services, (“CMS”). This lack of transparency in PBM operations is an impediment to both identify and control pharmacy benefit overpayments, particularly in Medicare Part D.[1]

Although there is a recognized need for transparency between the government and the public, on one side, and the PBM industry on the other, these efforts have yet to bear fruit. For example, even before the Part D program was added to Medicare in 2006, the General Accounting Office (GAO) highlighted the need for transparency and fairness should the Medicare drug benefit be outsourced to private insurers and PBMs. Ten years later, in January of 2013, the Office of Inspector General (OIG) called for CMS to amend Part D regulations to provide its auditors with direct access to information from pharmacies and PBMs. During September of 2015 hearings before the House Judiciary Committee on the State of Competition in the Pharmacy Benefits Manager and Pharmacy Marketplaces, witnesses addressed the concentration in the PBM industry, the ownership relationships between PBMs and retail pharmacies, and the lack of transparency in PBM operations negatively impacts competition and inures to the detriment of both health insurance plans and the ultimate consumer. One witness highlighted the lack of transparency in both rebates earned by PBMs and in prices that pharmacies were paying PBMs for drugs. Representatives of the PBM industry argued that transparency with regard to drug prices would result in price fixing.

In March of 2017, Senator Ron Wyden (D-Oregon) introduced S-637, “Creating Transparency to Have Drug Rebates Unlocked (C-THRU) Act.” The bill is focused on just one aspect of PBM secrecy – the rebates paid by drug makers to PBMs. In response, the PBM industry has again argued that secrecy in rebate negotiations is essential to allow PBMs to obtain the best prices and to prevent manufacturers and pharmacies from colluding with competitors. Whether the C-THRU Act even makes it out of the Senate Finance Committee is yet to be determined.

The process to create legislation or regulations that require transparency in the PBM industry is a very long and uncertain one. In the near term, only an industry insider can identify conduct that results in overpayments in Part D and other government-funded prescription programs. Meanwhile, PBMs continue to control the pharmacy industry, operating unchallenged and largely in secret, to create gigantic profits.

A recent news article in the New York Times, “The Bounty Hunter of Wall Street,” featured Andrew Left, an “activist” short seller who receives leaked documents and other intelligence about publicly-traded companies from confidential sources. Armed with this information, short sellers leak negative information to the press. When the information negatively impacts the target company’s stock price, the short sellers make millions.

As the article states, short sellers use inside information related to potential wrongdoing by publicly-traded health care companies, including pharmacy benefit managers (PBMs). PBMs are involved in literally every prescription that is dispensed, nationwide, every day. They play a critical role in the Medicare prescription drug program, Medicare Part D. The PBM industry is also one of the most opaque segments of the healthcare arena. It will take someone with access to drug data received by the PBM and drug data generated by the PBM to shed light on the inner workings of this multi-billion dollar industry.

Like PBMs, virtually every healthcare company earns significant revenues from billings to government funded programs, most notably Medicare and Medicaid. There are significant federal dollars spent on the federal employees health benefits program (FEHBP), and the healthcare programs for our military, including Tricare. A major portion of state budgets are also dedicated to funding healthcare for state and county employees.

However, there is a more appropriate use for inside information related to potential wrongdoing by publicly-traded or privately held healthcare companies, including PBMs. When the inside information is related to potential healthcare fraud (or other government contractor fraud), the taxpayers who contribute their hard-earned money to federal and state treasuries, and the person who assists in that endeavor by providing needed information, should be benefitting from that information – not wealthy short sellers.

There are programs that reward insiders who assist in ferreting out wrongdoing and returning fraudulent profits to federal and state governments. Those with knowledge of potential wrongdoing by any company that profits from federal or state government funds would do well to seek competent counsel who specializes in bringing cases under the federal False Claims Act, analogous state false claims acts, or the private insurance whistleblower statutes of California and Illinois. All of these statutes provide the relator, a person who is the source of such information, with share of the recovery (from 15 to 30%, and in the case of the California statute, potentially higher), in recognition of the whistleblower’s efforts.

On June 9, 2017, U.S. District Judge Reggie B. Walton (D.C.) denied a clinical laboratory defendant’s motion to dismiss a whistleblower’s False Claims Act case. The Court flatly rejected the lab’s attempt to avoid liability by arguing the doctor, not the lab, determines the medical necessity of a particular test. The court found, instead, that the lab has an independent duty to ensure that the tests it performs and seeks payment for are medically necessary. The Court’s ruling was based, in large part, on the certification of medical necessity submitted by the lab on claims forms such as the CMS-1500.

In United States of America, et al. ex rel. Tina D. Groat v. Boston Heart Diagnostics Corp., Dr. Groat, National Medical Director of Women’s Health and Genetics at United Healthcare, alleged that Boston Heart Diagnostics Corporation (“Boston Heart”) performed various genetic and non-genetic tests that were not medically necessary for particular patients. Dr. Groat alleged that Boston Heart’s marketing of tests that screened for cardiac-related issues and predicted future cardiac risk resulted in the submission of false claims for tests performed on patients with no history or current known risk or symptoms of having a cardiac problem. Despite the lack of medical necessity, Boston Heart completed and submitted CMS-1500 forms and sought Government reimbursement for the tests performed.

As part of their marketing efforts, labs frequently supply doctors with pre-printed test requisition forms. Doctors then fill out the forms and send them to a lab with the patient’s sample (i.e., blood) to be tested. Lab providers (such as Boston Heart) must complete and submit a CMS-1500 form to get reimbursed for the services provided. This form requires the entity submitting the claim, whether a “physician or supplier,” to certify the medical necessity of the services. CMS-1500, p.2 (Emphasis added).

In finding that Boston Heart, the lab submitting the claim, was responsible for certifying the medical necessity of the tests at issue, the Court focused on the plain language of the Medicare claim form. The CMS-1500 requires the submitting physician or supplier (i.e. the lab) to complete the required data fields and certification. The Court rejected the defendant’s attempt to argue that Medicare regulations related to maintenance of documentation regarding medical necessity, 42 C.F.R. §410.32(d)(2), shifts responsibility to the patient’s physician, finding instead that the regulation requires both the doctor and lab to maintain records. The Court also noted that the lab’s independent obligation to determine medical necessity is particularly appropriate where the lab created the requisition forms as part of its marketing activities, and the lab – not the physician – was billing the Government for the tests at issue.

This important ruling will have a real-life impact on healthcare fraud enforcement efforts in the laboratory arena. Service providers are on notice that they will be held accountable for the certifications they submit to the Government in order to receive payment. Labs can no longer dodge FCA liability by pointing to medical necessity determinations which appear to have been made by or in the name of a patient’s treating physician. The lab bears primary responsibility for the truthfulness of medical necessity certifications that are made on the face of the CMS-1500 form. The Government relies on the truthfulness of these certifications in making over $7 billion in Medicare Part B payments to clinical labs annually (FYE 2015).

In United States ex rel. Lutz v. Berkeley Heartlab, Inc., et al., 2017 WL 51691 (D.S.C. Apr. 5, 2017), the United States District Court for the District of South Carolina confirmed that the advice-of-counsel defense cannot be used as a sword and shield. In this action arising under the False Claims Act, the United States alleges that laboratories (HDL and Singulex) and their marketing agents (BlueWave and its principles) violated and conspired to violate the FCA in multiple ways, including (1) offering physicians kickbacks in the form of sham processing and handling fees to order expensive tests for federal healthcare beneficiaries from the labs, and (2) waiving co-pays for federal healthcare beneficiaries.

In their amended answer to the government’s complaint, the BlueWave defendants asserted as an affirmative defense their good-faith reliance on the advice of counsel. The government sought discovery related to the legal advice and opinions rendered by the attorneys in question. The BlueWave defendants declined to produce the requested documents, citing attorney-client privilege and work product protection, and the government moved to compel.

Earlier this month, the Court ruled in the government’s favor. It held that the BlueWave defendants had waived the attorney-client privilege as to the entire subject matter of the advice of counsel received by asserting it as an affirmative defense in its answer.

For the same reason, it held that the BlueWave defendants had held the work product protection. Moreover, the Court extended the waiver to attorney work product that was never communicated to the BlueWave defendants. In applying the waiver broadly to “uncommunicated work product,” as well as work product disclosed to the BlueWave defendants, the Court cited the government’s need to obtain discovery into the research conducted and considered by counsel, as well as whether any aspects of the advice was selectively ignored.

As such, the BlueWave defendants will have to produce all documents in their possession, custody, and control – including all relevant documents in the possession of their former attorneys – regarding their advice-of-counsel defense.

The United States Court of Appeals for the Fourth Circuit recently published a decision involving the government’s ability to execute writs of attachment against real and personal property as well as writs of garnishment against banks accounts. (See BlueWave Healthcare v. United States of America.)

In the underlying fraud case, Relators Lutz and Webster filed a qui tam action against a number of defendants including Robert Bradford Johnson, Floyd Calhoun Dent, and BlueWave HealthCare Consultants. In April 2015, the United States government intervened in the case. The relators and the government alleged that the defendants violated the Anti-Kickback Statute (42 U.S.C. 1320a-7b) and the False Claims Act (31 U.S.C. 3729 et seq.).

In 2016, the United States filed an application for prejudgment remedies under the Federal Debt Collection Procedure Act (FDCPA) before the trial court. Specifically, the government pursued writs of attachment against personal and real property and writs of garnishment against bank accounts totaling approximately $16.7 million dollars. This property is owned by a number of BlueWave entities, Dent and Johnson personally, and related nonparties. The government argued that, because Defendants violated the Anti-Kickback Statute and the False Claims Act, Defendants owed the United States and the relators at least $298 million. The government also alleged that prejudgment seizure was necessary because the defendants were actively concealing and disposing of assets.

In February 2016, the district court granted all but one of the government’s requested writs. Defendants each filed motions to quash the writs. In May 2016, the District Court found that the government had satisfied all of the FDCPA’s statutory requirements and denied the motions. The defendants filed a notice of appeal to the 4th Circuit Court of Appeals.

Appellants (the defendants in the underlying case) challenged the District Court’s denial of their motions to quash. The appellants asserted that the order was reviewable as either a collateral order or an injunction. The Court of Appeals rejected both arguments. First, the Court looked to the three conditions required to apply the collateral order: “The order must (1) conclusively determine the disputed question, (2) resolve an important issue separate from the merits of the action and (3) be effectively unreviewable on appeal from a final judgment.” The Court focused on the second condition that requires that the order must resolve an important issue separate from the merits of the action. The Court found that the order was so intertwined with the merits of the qui tam action, that the collateral order doctrine could not be applied.

Next, the Court turned to the argument that the order could be reviewed as an injunction. The Court ruled that the order denying the motion to quash could not be reviewed as such because it did not meet the basic requirements of an injunction. The Court concluded that the denial was an unreviewable interlocutory order and dismissed for lack of jurisdiction.

The ruling allows the government to keep the writs of attachment active and preserve the defendants’ funds until a final judgment is reached in the qui tam case.

United States ex rel. Gohil v. Aventis, Inc. is a long-running False Claims Act suit filed in the Eastern District of Pennsylvania by an ex-sales specialist against his former employer, behemoth pharmaceutical company, Sanofi Aventis. Relator Yoash Gohil filed this qui tam suit in 2002 alleging that his former employer engaged in a fraudulent marketing scheme to promote off-label the chemo-therapy drug, Taxotere.

The Relator alleges that Aventis trained and directed its sales force to misrepresent the safety and effectiveness of the chemotherapy agent in order to expand the market share for Taxotere beyond its FDA approval as a “second line treatment.” A second line treatment is one that is approved for limited use only after the failure of a prior treatment. Relator also alleges that Aventis had engaged in a kickback scheme that included sham grants, exorbitant speaking fees, and excessive preceptorship fees paid to physicians in order to incentivize them to prescribe Taxotere.

Aventis moved for a partial judgment on the pleadings and raised two grounds for dismissal. First, Aventis argued that some of the claims (those from 1996 to 2000) were barred by the statute of limitations. Federal District Court Judge Lawrence Stengel rejected this argument finding that the pharmaceutical company was given fair notice of the claims when the First and Second Amended Complaints were filed. The Court accepted Relator’s argument that all of the new claims “related back” to the claims laid out in his original complaint.

Second, Aventis argued that some of Relator’s claims were precluded by the First Amendment. This argument has been made with increasing frequency by the pharmaceutical industry in trial and appellate courts throughout the United States. Aventis argued that First Amendment protections extend to commercial speech and that parts of Relator’s claims were based on truthful, non-misleading speech regarding Taxotere. Judge Stengel rejected this argument as well, finding that Relator’s Complaint had asserted that the off-label promotion was false and/or misleading. Ultimately, the dispute over the whether the speech was false or misleading is material to the outcome of the case. Judge Stengel held that the First Amendment issue was not ripe for disposition and denied the motion for partial summary judgment. He wrote, “This question is better answered by a jury.”

On Monday, the DOJ announced the resolution of criminal allegations and a False Claims Act (“FCA”) lawsuit a relating to a scheme to defraud the United States and obtain kickbacks in exchange for patient referrals. A major U.S. hospital chain, Tenet Healthcare Corporation and two subsidiaries, Atlanta Medical Center, Inc. and North Fulton Medical Center, Inc., will pay over $513 million pursuant to a series of agreements, including a civil settlement agreement, non-prosecution agreement, and plea agreements:

FCA settlement: Tenet Healthcare and related entities – described in the settlement as “the Tenet Entities – agreed to pay $368 million to the federal government and to Georgia and South Carolina to resolve claims brought by a Georgia whistleblower. The FCA suit was filed in the Middle District of Georgia and claimed that Tenet Healthcare paid bribes and kickbacks to pre-natal clinics to unlawfully refer Medicare and Medicaid patients to its hospitals. The whistleblower will receive $84 million under the agreement. The agreement stated that the Tenet Entities denied any liability regarding the false claims allegations.

Non-prosecution agreement: Tenet HealthSystem Medical Inc., the corporate parent of Tenet Healthcare, entered into a non-prosecution agreement (“NPA”) with DOJ based on similar allegations to those within the FCA case. The NPA allows the two companies to avoid criminal prosecution in exchange for following the agreed-upon terms. The criminal allegations at the heart of the NPA focused on an alleged conspiracy to defraud the United States and to violate the Anti-Kickback Statute, which bars illegal payments that induce patient referrals for services paid for by federal health care programs. Under the NPA, Tenet HealthSystem and Tenet Healthcare will avoid criminal prosecution if they cooperate with the government’s prosecution and strengthen their internal controls, including their compliance and ethics programs. The NPA is effective for three years, although it may be extended for an additional year if necessary.

Plea agreements: Two subsidiaries of Tenet Healthcare, Atlantic Medical Center and North Fulton Medical Center, agreed to plead guilty to a criminal information for their role in the conspiracy, as referenced above, to defraud the United States and violate the Anti-Kickback Statute. Under the plea agreements, the two healthcare will forfeit over $145 million to the United States, collectively representing the amount paid to the two entities by the federal Medicare and Georgia Medicaid programs for services paid to patients referred as part of the conspiracy.

Additional information, including the FCA settlement agreement, NPA, and criminal information can be found here.

The United States has filed a False Claims Act case against Tennessee-based nursing home company, Vanguard Healthcare LLC, as well as Vanguard Healthcare Services LLC, and six of its nursing facilities. See United States vs. Vanguard, et al.,case no. 3:16-cv-2380 (M.D.Tenn 2016). The lawsuit alleges that the defendants were responsible for the submission of false claims to Medicare and TennCare (Tennessee’s Medicaid program) for skilled nursing home services that were either non-existent or grossly substandard. The case represents the commitment of the U.S. Attorney’s office to combat elder abuse, neglect, and financial exploitation, especially as they impact Medicare and Medicaid beneficiaries.

Specifically, the complaint alleges that the Vanguard nursing facilities in Tennessee failed to provide the most basic and essential skilled nursing services to their residents, which led to pressure ulcers, dehydration, and malnutrition. The absence of appropriate care included chronic staffing deficiencies as well as shortages of critical medical supplies. The complaint describes the failure to provide standard infection control, failure to administer medication to residents as prescribed by their physicians, failure to provide wound care, and failure to adequately manage residents’ pain. Further, there are allegations that staff was providing unnecessary and excessive psychotropic medications to residents and using unnecessary physical restraints on residents. The lawsuit also names Vanguard’s former Director of Operations for knowing that the care was inadequate and failing to correct the problems.

Beyond the false claims for non-existent or worthless services, the complaint also alleges that some of the Vanguard facilities fraudulently submitted falsified Pre-Admission forms to TennCare, in order to receive payments. These required forms were allegedly submitted with forged physician and nurse signatures.

Prior to this, in 2011, Vanguard settled a whistleblower lawsuit in federal court stemming from allegations that Vanguard and its subsidiaries were defrauding Medicare and Medicaid by double-billing, submitting clams for free items that had been received at no cost, and failures to disclose related parties.

The U.S. Attorney’s Office in Philadelphia announced that several Lehigh Valley medical facilities and three doctors will pay in excess of $690,000 to settle false health care bill claims to Medicare and other federal benefits programs. The allegations under the False Claims Act were made by whistleblower Margaret Reynard against Dr. Yasin Khan, Dr. Elizabeth Khan and Dr. Dong Ko. Also involved were Westfield Hospital and Lehigh Valley Pain Management, an affiliated pain clinic. Between July 1, 2007 and December 31, 2013, Reynard claimed that the doctors received reimbursement for services performed “incident to” by non-physicians when the doctors were not in the office or clinic, increasing the bills by 15 percent because the “incident to” services required the doctor to supervise the non-physician. In addition to Medicare, the claims were submitted to government programs such as the Federal Employees Health Benefits Program and Department of Labor Office of Worker’s Compensation programs.

A whistleblower’s retention and disclosure of confidential documents did not amount to breach of his employment contract, according to the U.S. District Court for the Northern District of Illinois.

In United States ex rel. Cieszyski v. LifeWatch Services, Case No. 13-cv-4052 (N.D. Ill.), relator and one-time LifeWatch salesperson Matthew Cieszyski alleges that his former employer violated federal and state False Claims Acts (“FCAs”) by submitting for government reimbursement claims for heart monitoring services that violated relevant Medicare and Medicaid regulations. LifeWatch counterclaimed that Cieszyski had breached a confidentiality agreement and privacy policy – both of which, it contended, were components of his employment contract – by retaining and disclosing to the government confidential company documents.

Breach of Contract Must Be Independent from Any Fraud Investigation

The court held that LifeWatch failed to state a claim for breach of contract and thus dismissed the counterclaims. There was no dispute that Cieszyski had signed a confidentiality agreement as a condition of his employment, or that he removed documents from the company’s premises, contrary to the agreement’s terms. But, according to the court, enforcing the agreement would undermine the protections against retaliation afforded relators by the federal and state FCAs.

At root of the dismissal was the court’s conclusion that LifeWatch’s counterclaims derived completely from the FCA claims lodged against it. LifeWatch did not contend that Cieszyski had retained or disclosed the information for any reason other than alleging the company’s FCA violations. There was no evidence that he shared the documents with anyone other than his attorneys or the government. Nor did LifeWatch claim harm beyond its exposure to the FCA suit or damages beyond the fees and costs associated with bringing the counterclaims – “a self-inflicted wound,” in the court’s parlance. Cieszyski had not, for example, revealed trade secrets that could have jeopardized LifeWatch’s standing in the market.
Interest in Confidentiality Subordinate to Anti-Retaliation Protections

Finally, the court rejected LifeWatch’s argument that Cieszyski had collected and shared more information than was needed to support his allegations of fraud. The court declined to burden relators with the obligation to know the precise quantum of evidence necessary to make their FCA cases and to limit their disclosures accordingly. The key question is whether the relator has gathered the evidence for a reason other than furthering an investigation of possible FCA violations. LifeWatch could not persuasively attribute an ulterior motive to Cieszyski. Accordingly, his statutory right to be free from retaliation overwhelmed LifeWatch’s interest in having its confidential information protected.